Startup India FoF 2.0: AIF Eligibility & Tax Rules for Managers
Startup India Fund of Funds 2.0 puts ₹10,000 crore behind SEBI-registered Category I and Category II AIFs, not startups directly. Here is the daughter fund eligibility criteria, DPIIT prerequisites, and the Section 115UB tax framework AIF managers and founders need to check before applying.
CA Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Legal basis: Not yet codified as a standalone statute — Startup India Fund of Funds 2.0 operates under a Government of India/DPIIT scheme notification implemented through SIDBI, with underlying investment vehicles governed by the SEBI (Alternative Investment Funds) Regulations, 2012, and pass-through taxation under Sections 115UB and 10(23FBA) of the Income-tax Act, 1961 — Effective: 13 April 2026. Source: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2251638. Last reviewed by CA Harun Raaj: September 2026.
The Government of India has put ₹10,000 crore behind Startup India Fund of Funds 2.0 (FoF 2.0), and not one rupee of it goes directly into a startup's bank account. Small Industries Development Bank of India (SIDBI) deploys the corpus into SEBI-registered Category I and Category II Alternative Investment Funds — "daughter funds" — which then invest in DPIIT-recognised startups. DPIIT is also onboarding an additional implementation agency to widen sectoral coverage. For AIF managers seeking government co-anchor capital, and for founders trying to understand how this money eventually reaches them, the structure, eligibility, and tax treatment matter more than the headline number.
Why the Government Invests Through AIFs, Not Directly
SIDBI does not pick startups directly — it picks fund managers. Daughter funds are expected to raise additional private capital from domestic and foreign LPs on top of the SIDBI commitment, multiplying the total pool available to Indian startups. This design keeps government capital inside a market-discipline framework — AIF managers remain accountable to their own LPs, not only to SIDBI — and it builds institutional capacity among India's domestic VC fund managers. The scheme spans the 16th and 17th Finance Commission cycles, giving it a multi-year deployment horizon rather than the stop-start pattern seen in earlier government venture programmes.
Daughter Fund Eligibility
An AIF seeking an FoF 2.0 allocation must clear four baseline requirements:
- SEBI registration as Category I or Category II AIF. Category I includes venture capital funds, angel funds (a separate sub-class following the June 2026 restructuring), infrastructure funds, and social venture funds. Category II includes PE funds, debt funds, real estate funds, and fund-of-funds investing in other AIFs.
- A DPIIT-aligned investment mandate. The fund's Private Placement Memorandum (PPM) must cover DPIIT-recognised startups, and portfolio companies must hold a valid DPIIT recognition certificate at the time of investment.
- Equity or equity-linked deployment. Investments must be made through equity or instruments such as Compulsorily Convertible Preference Shares or Compulsorily Convertible Debentures; pure debt deployments generally fall outside the FoF 2.0 mandate.
- SIDBI due diligence. SIDBI reviews fund manager track record, investment team credentials, governance, and portfolio construction approach. Managers with no prior deployment history face closer scrutiny.
Applications and detailed documentation requirements are handled through the SIDBI Venture Capital Fund portal (sidbivcf.in), as set out in DPIIT's Operational Guidelines for the scheme.
DPIIT Recognition: The Portfolio Company Prerequisite
A startup cannot receive investment from an FoF 2.0-backed daughter fund without active DPIIT recognition. Current Startup India eligibility criteria require the entity to be:
- Incorporated as a private limited company, LLP, or partnership in India.
- Not more than 10 years from its date of incorporation.
- Within an annual turnover of ₹200 crore in any financial year since incorporation (a threshold revised in 2026).
- Working towards innovation, development, or commercialisation of a new product, process, or service.
Recognition is self-certified at startupindia.gov.in. It is not the same as the Section 80-IAC income-tax holiday — that requires a separate certificate from the Inter-Ministerial Board (IMB). Recognition opens the door to FoF 2.0-linked capital; on its own, it does not unlock the tax holiday.
Tax Framework: Daughter Fund and Its Investors
Category I and Category II AIFs are pass-through entities under Section 115UB and Section 10(23FBA) of the Income-tax Act, 1961, applicable for AY 2026-27 (FY 2025-26 income), with the Income Tax Act 2025 taking over from Tax Year 2026-27. Under this regime, income is not taxed at the fund level. It is deemed to accrue to investors in proportion to their units, at the time of accrual, and each investor is taxed at their own applicable rate and holding period. Long-term capital gains on unlisted shares held for 24 months or more attract 12.5% under Section 112, without indexation, following the Finance Act 2024 amendment effective 23 July 2024. Short-term gains on unlisted shares held under 24 months are taxed at the investor's slab rate. One point that matters for fund managers: business income earned at the AIF level is taxed at the maximum marginal rate even under the pass-through regime, relevant where portfolio income is classified as business income rather than capital gains.
Key point: FoF 2.0 channels its ₹10,000 crore corpus into DPIIT-recognised startups exclusively through SEBI-registered Category I and Category II AIFs, never as a direct government investment.
What AIF Managers and Founders Should Verify
For AIF managers, an FoF 2.0 allocation is not automatic on SEBI registration alone — SIDBI's due diligence on team, governance, and mandate alignment decides it. For founders, the practical checklist before approaching a fund is to confirm whether that fund appears on the published daughter fund list at sidbivcf.in, whether the company's DPIIT certificate is current, and whether an IMB application has been filed if the goal is to make the Section 80-IAC benefit available further down the chain.
I'm CA Harun Raaj, Visakhapatnam. If you manage a SEBI-registered AIF exploring an FoF 2.0 allocation, or run a DPIIT-recognised startup evaluating this capital pool, get in touch and I'll help you work through the specific compliance steps.
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See Also
Frequently Asked Questions
Can an AIF already in its investment period apply for FoF 2.0 funding?
Yes, provided the fund is still within its investment period and its Private Placement Memorandum covers DPIIT-recognised startups. SIDBI's review focuses on the manager's track record and mandate alignment, not merely SEBI registration status.
Is Startup India Fund of Funds 2.0 limited to technology startups?
No. The FoF 2.0 mandate covers DPIIT-recognised startups across sectors, including agri-tech, health-tech, manufacturing, and fintech, wherever DPIIT recognition has been granted to the startup.
What is the minimum corpus a daughter fund must have?
SEBI's baseline requirement under the AIF Regulations, 2012 sets a minimum corpus of ₹20 crore for Category I and II AIFs; SIDBI may apply a higher operational threshold for FoF 2.0 allocations, which should be verified at sidbivcf.in.
Does SIDBI co-invest alongside the daughter fund in each startup?
No. SIDBI commits capital at the AIF level to the daughter fund. The daughter fund's manager makes the individual startup investment decisions, and SIDBI does not co-invest directly at the portfolio company level.
Do I need both DPIIT recognition and the IMB certificate to get tax benefits?
DPIIT recognition alone qualifies a startup to receive investment from an FoF 2.0-backed daughter fund, but the Section 80-IAC income-tax holiday requires a separate certificate from the Inter-Ministerial Board (IMB). Recognition and the tax holiday are two distinct approvals.
How are capital gains from AIF investments taxed for individual investors?
Under the pass-through regime in Sections 115UB and 10(23FBA) of the Income-tax Act, 1961, gains are deemed to accrue directly to investors. Long-term gains on unlisted shares held 24 months or more are taxed at 12.5% under Section 112 without indexation, per the Finance Act 2024 amendment effective 23 July 2024, while shorter holdings are taxed at the investor's slab rate.
Is business income earned by an AIF taxed differently under the pass-through rules?
Yes. Even under the pass-through regime, business income earned at the AIF level is taxed at the maximum marginal rate, which matters for funds where portfolio income is classified as business income rather than capital gains.
Where can a startup check if a VC fund has an FoF 2.0 allocation?
The published daughter fund list is maintained on the SIDBI Venture Capital Fund portal at sidbivcf.in, and founders should confirm a fund's listing there alongside checking that their own DPIIT recognition certificate is current.
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